ANALYSIS:Denis O'Brien's dawn attack brings forward the final battle with Sir Anthony O'Reilly

THE PHONEY peace is over. Denis O’Brien’s dawn attack on Independent News Media (INM) brings forward the final battle with his rival Sir Anthony O’Reilly for control of the firm.

Sooner or later, the end of the shaky détente between the two men will lead to a fully-charged takeover battle.

The immediate catalyst for the latest confrontation was the decision of INM management in defiance of O’Brien to move forward with a sale of INM Outdoor, a South African outdoor advertising business. In advance of that, a lengthy INM board meeting last Wednesday turned exceptionally fractious over the course of six or seven hours.

Sources briefed on the engagement said there was particularly pointed antagonism between Lucy Gaffney, one of three O’Brien associates on the board, and Baroness Jay, the senior independent director whom O’Brien is now seeking to replace.

A vote of confidence in the baroness at the prior meeting of the board – proposed by directors not aligned to O’Brien at the same time as a confidence vote they proposed in chairman Brian Hillery – followed sustained questioning of her independence from his camp. In forthright terms, she defended her independence.

The situation worsened appreciably after 6pm on Thursday. There was a rancorous exchange by phone between O’Brien, who was in Ibiza, and INM chief executive Gavin O’Reilly, a son of Sir Anthony. Another of O’Brien’s associates on the board, Paul Connolly, listened in. INM was preparing to publish a poor set of interim results the next morning and release news of the INM Outdoor deal.

While Gavin O’Reilly and O’Brien had made light of their differences at the time of their accord last March, the months since then have been marked by increasingly public demonstrations of discord by O’Brien. Gavin O’Reilly had said nothing in public about O’Brien’s remarks but he was now set to defy him by proceeding with a deal that his 26 per cent stake was not big enough to block.

Informed sources said the stridently barbed tenor of that phone call on Thursday was such that any working relationship the two men had was now over.

O’Brien had argued for months that the plans put forward by Gavin O’Reilly and his team were but sticking-plaster solutions to a problem requiring major surgery. Although it was pressure from INM’s banks that brought the two camps together last March, the dispute was “personal” again and the stage was set for a public parting.

This happened early yesterday morning when O’Brien’s statement was e-mailed to reporters.

The real danger here for INM is that it has been in default on an overdue €200 million bond since May. As the firm tries to find a way out of the morass, it is relying month-by-month on forbearance from banks and bondholders.

While O’Brien’s intervention raises the stakes considerably, a steep decline in profits adds to acute pressure on INM. So does heightened risk that the latest fireworks could lead to a call on a significant debt by a creditor, a move that would ultimately push INM into examinership.

Of the eight resolutions O’Brien has proposed for an egm, the most crucial is his call on investors to block the INM Outdoor sale. The €98 million transaction is the centrepiece of INM’s effort to raise funds in order to ease its renegotiation of some €1.3 billion in bank and bond debt. Without it, Gavin O’Reilly’s plan would fail.

INM has yet to find a formula acceptable to all sides and O’Brien has publicly resisted its proposals.

Thus the move to ask shareholders to block the INM Outdoor sale at the egm will in essence be a proxy vote in which investors will be asked to back O’Brien or back Gavin O’Reilly, whose father holds 28 per cent of INM. This will determine who takes control of the steering wheel if not, for the moment at least, outright control.

Victory for INM management would temporarily preserve the increasingly unsustainable status quo while its strives to reach a deal with banks and bondholders. It is a given that O’Brien won’t back such a deal. This means a refinancing formula would have to be found that would ensure success without his support. That would be truly difficult. Any rejection of the management proposal would undermine Gavin O’Reilly and his closest lieutenants, most likely fatally.

Yet O’Brien has still not come up with an alternative route-map for INM to overcome the debt dilemma it faces. While he will set out his vision for the firm in the coming weeks, his proposal will have to address the refinancing dilemma. Just as INM management needs to bring bondholders, banks and other shareholders with it, O’Brien will have to do the same.

The upshot of all this is that a solution in which the O’Reilly and O’Brien camps agree to co-exist is no longer possible. Sir Anthony is down €500 million on his INM shares and, with his brother-in-law, lost €400 million in the collapse of Waterford Wedgwood. O’Brien is down €500 million on his INM stake.

Refinancing remains the immediate challenge. Even if a deal can be done and even if examinership can be avoided – bigger ifs now than previously – the endgame is upon us. In its weakened state, INM remains the prize that both camps want ultimate control over.

“It’s clear that there’s no compatibility going forward,” says a senior stockbroker. “Clearly it’s much worse than we’re seeing. If it’s this drastic and ugly in public, it must be very, very bad.”